Note from Daily Trade Alert: We recently launched a new, regular column here at Daily Trade Alert called High-Yield Trade of the Week. The goal of this column is to show our readers how to safely boost their income from some of the best stocks in the world. It’s our sincere hope that you benefit from this new service.
If you followed along with our inaugural High-Yield Trade of the Week, congratulations: We just booked a 3.3% total return in 42 days with Nike (NKE).
That may not sound like a lot, but that’s a 28.9% annualized yield from a stock that would “normally” pay just 1.3% (if you relied on dividends alone).
Our high-yield trading strategy is simple: We sell a cash-secured put or a covered call on a high-quality dividend growth stock when it appears to be trading at a reasonable price.
When executed properly, this kind of trade can regularly pay 10%-plus annualized yields from some of the best companies in the world.
With our Nike trade closed out, and with shares back in bargain territory today, right now could be a good time to make another high-yield trade with the stock.
In fact, I just made one in my retirement account on Wednesday, and I shared the details in yesterday’s issue of Trades Of The Day.
While there’s no guarantee we’ll make money this time around, I like the setup here.
In short, Nike is a world class dividend grower that appears to be selling at less than fair value. And by making a high-yield trade here, we have a relatively low-risk opportunity to generate safe, high income.
While the numbers below are more updated than the ones from my own trade, please keep in mind that share prices and options premiums are constantly changing.
Here’s the opportunity we’re looking at as we go to press…
High-Yield Trade of the Week:
Sell the September 29, 2017, $54.50 call on shares of Nike (NKE)
As we go to press, NKE is selling for $53.94 per share and the September 29 $54.50 calls are going for about $1.41 per share.
Our trade would involve buying 100 shares of NKE and simultaneously selling one of those calls.
By selling a call option, we would be giving the buyer of the option the right, but not the obligation, to purchase our 100 shares at $54.50 per share (the “strike” price) anytime before September 29 (the contract “expiration” date).
In exchange for that opportunity, the buyer of the option would be paying us $1.41 per share (the “premium”).
Because we’re collecting immediate income when we open the trade, we’re lowering our cost basis on the shares we’re buying.
That’s what makes this trade safer than simply purchasing shares of the underlying stock the “traditional” way.
With all of this in mind, there are two likely ways our High-Yield Trade of the Week would work out, and they both offer significantly higher income than what we’d collect if we relied on the stock’s dividends alone.
To be conservative, we don’t include any dividends in our calculations for either of the following scenarios. The annualized yields are generated from options premium and applicable capital gains alone. So any dividends collected are just “bonus” that will boost our overall annualized yields even further. Let’s take a closer look at each scenario…
Scenario #1: NKE stays under $54.50 by September 29
If NKE stays under $54.50 by September 29, our options contract would expire and we’d get to keep our 100 shares.
In the process, we’d receive $141 in premium ($1.41 x 100 shares).
That income would be collected instantly, when the trade opens.
Excluding any commissions, if “Scenario 1″ plays out, we’d receive a 2.6% yield for selling the covered call ($1.41 / $53.94) in 35 days. That works out to a 27.3% annualized yield.
Scenario #2: NKE climbs over $54.50 by September 29
If NKE climbs over $54.50 by September 29, our 100 shares will get sold (“called away”) at $54.50 per share.
In “Scenario 2” — like “Scenario 1” — we’d collect an instant $141 in premium ($1.41 x 100 shares) when the trade opens. We’d also generate $56 in capital gains ($0.56 x 100) when the trade closes because we’d be buying 100 shares at $53.94 and selling them at $54.50.
In this scenario, excluding any commissions, we’d be looking at a $197 profit.
From a percentage standpoint, this scenario would deliver an instant 2.6% yield for selling the covered call ($1.41 / $53.94) and a 1.0% return from capital gains ($0.56/ $53.94).
At the end of the day, we’d be looking at a 3.7% total return in 35 days, which works out to a 38.1% annualized yield from NKE.
Here’s how we’d make the trade…
We’d place a “Buy-Write” options order with a Net Debit price of as close to $52.53 ($53.94 – $1.41) as we can get — the lower the better. Options contracts work in 100-share blocks, so we’d have to buy at least 100 shares of Nike (NKE) for this trade. For every 100 shares we’d buy, we’d “Sell to Open” one options contract using a limit order. Accounting for the $141 in premium we’d collect, that would require a minimum investment of $5,253.
Good Trading!
Greg Patrick
P.S. We’d only make this trade if: 1) we wanted to own the underlying stock anyways 2) we believed it was trading at a reasonable price 3) we were comfortable owning it for the long-haul in case the price drops significantly below our cost basis by expiration and 4) we were comfortable letting it go if shares get called away. To be mindful of position sizing, except in rare cases, the value of this trade wouldn’t exceed 5% of our total portfolio value. In addition, to minimize taxes and tax paperwork, we would most likely make this trade in a retirement account, such as an IRA or 401(k).
Please note: We’re not registered financial advisors and these aren’t specific recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we do our research, to the time we publish our article, to the time you’re alerted about it. So please don’t attempt to make this trade yourself without first doing your own due diligence and research.